SVXY k-1 and Turbotax

[fusiforme]

I did not begin trading SVXY until last year and it was the first k-1 I had ever received. Reading the "instructions" on the form itself, I felt like I was trying to decipher some impenetrable foreign language. The people at ProShares seemed just as confused as I was. No one could actually clearly tell me what needed to be done, and one person almost certainly misinformed me, telling me to enter the k-1 information only and saying I did not need to enter my SVXY trades on my Schedule D (advice I doubted and did not follow). I gleaned some information from the internet, but could find only bits and pieces and no clear walk-through for this process.

Since Turbotax told me their software can accurately handle k-1s and I was pressed for time, I relied on their "software assistant." I was a little ill at ease though, because the assistant's questions did not seem to match up exactly with the various boxes containing numbers on the k-1 issued by Proshares.

I have since learned that SVXY profits are supposed to be taxed 60% long term and 40% short term, but I have no idea if the Turbotax k-1 assistant handled this, since all my trades were entered as short term.

At this point I think I probably overpaid and if I want to get refunded I will need to amend my 2013 return or take it to a tax professional who understands k-1s (I keep reading that many don't). But I will probably just let it go if I can get the information I need to ensure my 2014 forms are accurate and that I know what to do in the future.

I held some shares of SVXY from 2013 into 2014 and have since traded it a few times, as well as sold options against it. So this year I would really like to make sure I get it right.

I hope it will not be necessary for me to hire a tax expert just to take care of this k-1, since it is the only thing in my taxes I am not confident I know how to handle myself.

Does anyone here trade SVXY (or a fund with identical tax implications) and also file using Turbotax, who could let me know if the k-1 assistant provided by the software is adequate?

Assuming some manual adjustments need to be made, a walk-through of these would be greatly appreciated!

Thanks.

 

[Amalgam]

https://ttlc.intuit.com/questions/2399158-forms-1099-b-k-1-proshares-ultra-vix-etf

I've never traded anything requiring a K-1 but I found this if it helps.

 

[sprstpd]

I am not a tax expert but I do my own taxes - so go talk to a tax expert if you want to be confident in what you are doing. However, I bet a very few percentage of tax experts would know this stuff anyway. You'd probably have to go to a place that specializes in trading like GreenTraderTax.

That being said, this is how I would do it. You have to report the K-1 numbers, but these affect your cost basis. So if the K-1 shows a gain of $1,000, that means your cost basis is raised by $1,000 (you should see this in Box L of your K-1, Current year increase (decrease) - it would say $1,000). So supposing you got rid of all your SVXY shares, then on Schedule D (Form 8949) the reported cost basis would be $1,000 higher so it would counterbalance the profits on your K-1. Similary, if the K-1 shows a loss of $1,000, that means your cost basis is lowered by $1,000. You must keep track of your cost basis until you close out your SVXY position at which point you use that new cost basis on Schedule D (Form 8949). The important point is that even though you have to report the K-1 numbers, those are reflected in your cost basis so you aren't gaining or losing anything.

It may be different if you are not trading SVXY short-term, i.e., you do have to keep track of your cost basis until you sell the shares which can be complex if you are holding them long-term. Plus I believe there are other rules on cost basis but these generally only apply if you have held a security for a long time.

The way I like to think about it is if you just reported your SVXY trade without reporting the K-1 numbers (assuming you traded SVXY short-term and closed out the position by year end), then your tax liability would be correct. But the IRS is going to check for compliance on your K-1 so you have to match the numbers there but then transfer the opposite gain/loss to your cost basis. To make sure the IRS is able to match the transactions on your Schedule D (Form 8949), you should probably write out two entries - one for the trade reported by your brokerage and one that details the cost basis change. I.e., you want the IRS to be able to match the trades reported by your brokerage (and your brokerage has no clue what your K-1 says). If you paper file, I highly suggest writing a Notes Addendum section which details why you changed the cost basis for these trades and then on your tax return say something like "See Notes" where these cost basis changes happen.

In summary, it is just another example of red tape. And when you are short-term trading it just results in moving numbers around so that you can both satisfy your K-1 and Form 8949 reporting requirements simultaneously. But it should not affect your tax liability at all.

 

[fusiforme]

Amalgam, I appreciate the link to the related question on the intuit forum. I will see what I can learn from that.

sprstpd, thanks a lot for your detailed reply. it is very helpful.

Since ProShares themselves couldn't help me, I suspect you are right about most tax experts also being unfamiliar with the intricacies of these funds, which is one of the reasons I want to learn how to do it myself.

what you are saying makes a lot of things clear. The number on my k-1 for 2013 was quite a bit higher than the profit on my trades. so once I entered the info from my k1, my taxes owed increased quite noticeably. after reading your explanation, I can see this is because I did not raise my cost basis on my reported trades to reflect the gain in box L.

Unfortunately I have been living overseas since then, and do not have my 2013 tax forms available to check this out but it seems like this should be fairly easy to correct. I assume I should be able to file an amended return adding the figure in box L to my SVXY cost basis and submit a written explanation to the IRS explaining that the higher cost basis adjustment was made to reflect the profit in box L?

one thing you did not mention in your reply was the 60% longterm/40% short term cap gain rate I have read about on SVXY? Is this also somehow worked out by the number in box L after you adjust your cost basis, or is this something else which needs to be adjusted manually?

The last thing I am wondering about is if there is if there is anything additional that needs to be worked out in 2014 taxes for shares bought in 2013 which were held into 2014?

Some shares of SVXY which I bought in November of 2013 were not sold until January of 2014, when some calls I sold against the shares were ITM, leading to exercise.

The number on the k-1 represents taxes on shares you still hold in your account at the end of the year, as well as any shares you have sold before year end, correct?

I have recently shifted to trading the ETNs rather than the ETFs, to avoid this k1 business in the future!

Thanks again for your helpful reply.

 

[sprstpd]

Unfortunately I have been living overseas since then, and do not have my 2013 tax forms available to check this out but it seems like this should be fairly easy to correct. I assume I should be able to file an amended return adding the figure in box L to my SVXY cost basis and submit a written explanation to the IRS explaining that the higher cost basis adjustment was made to reflect the profit in box L?

That would be what I would do, although again I must say I am not a tax expert so you should treat everything I say with skepticism. However, if you held shares from 2013 to 2014, then it is possible the cost basis of trades in 2013 would not be affected. It all depends on when these K-1 events happened that resulted in numbers appearing in your K-1 (if that makes sense). Usually on the K-1 it shows you a "Sales Schedule" and on that schedule there is a column that says "Cumulative Adjustment to Basis". That should show you which trades you did resulted in one of these K-1 events happening (i.e., a number gets generated on your K-1). I.e., only those trades with adjustments to basis need to be adjusted on your Schedule D (Form 8949).

one thing you did not mention in your reply was the 60% longterm/40% short term cap gain rate I have read about on SVXY? Is this also somehow worked out by the number in box L after you adjust your cost basis, or is this something else which needs to be adjusted manually?

My opinion on this is that if you are trading SVXY shares then no, you do not get 60%/40% tax treatment on your SVXY trades (i.e., on your Schedule D). However, SVXY might generate numbers in Box 11, C (Sec. 1256 contracts & straddles) which do get 60%/40% tax treatment. Your tax software (TurboTax, H&R Block, etc.) will generally take the numbers on the K-1 and move them onto the right forms. In this case, it should move the Box 11, C entry to From 6781, line 1. Since I never trust my tax software to get this stuff right, I always double check what it does with K-1s. In my case, I use H&R Block and it even admits during the interview process that it does not handle PTPs (Publically Traded Partnerships) correctly.

The last thing I am wondering about is if there is if there is anything additional that needs to be worked out in 2014 taxes for shares bought in 2013 which were held into 2014?

Follow your Sales Schedule and determine which transactions need adjustments to their basis. That should guide you on how to adjust your Schedule D transactions. Always report the numbers on your K-1 and make sure your tax software carries those numbers to appropriate places on your tax form. Then I think you will be good to go.

Some shares of SVXY which I bought in November of 2013 were not sold until January of 2014, when some calls I sold against the shares were ITM, leading to exercise.

I don't have much experience with options and how they affect your taxes so I don't really have any idea on that. For the SVXY shares though, your Sales Schedule should show you when you are allowed to adjust your cost basis on individual trades.

The number on the k-1 represents taxes on shares you still hold in your account at the end of the year, as well as any shares you have sold before year end, correct?

Yes, but again the Sales Schedule will show you how to apply those numbers in terms of adjusting your cost basis on individual transactions.

 

[Don Davis]

I did not begin trading SVXY until last year and it was the first k-1 I had ever received. Reading the "instructions" on the form itself, I felt like I was trying to decipher some impenetrable foreign language.

<snip>

Assuming some manual adjustments need to be made, a walk-through of these would be greatly appreciated!

Thanks.

To fusiforme

ProShares has a list of 12 FAQs about its K-1 forms here,
http://www.proshares.com/faqs/volatility_commodity_currency_proshares_taxation_faqs.html#

It's not exactly a walk-through, but I think a little study will clarify most questions.

Item 9 allows you to sign up to receive a paperless K-1, about 1 week earlier.

Item 8 leads to a Website for additional info about your K-1 (specifically for SVXY), incl.
1. Sign up for an e-mail alert when your paperless K-1 is ready
2. Download a file of K-1 info that can be imported into tax software!
3. View any prior year tax info
4. Correct any wrong information on your K-1.

I hope this helps!

 

[fusiforme]

sprstd,

I'm hoping I can pick your brain again about this k1 issue, because I just returned to the states and I now have all my tax information before me.

The most relevant info:

I see I bought and sold for a profit a small amount of SVXY shares during 2013. On my sales schedule the "cumulative adjustment to tax basis" is listed as 0.

Near the end of the year I took a much larger position which I held into 2014.

Now here is what I notice, and what concerns me: the amount in box 11c on my k1 is 360% larger than the amount of the profit I made on my sales of SVXY for the year.

Why? Is this because of the large amount of shares I bought in November and held into 2014? And does that mean I am also paid taxes on those shares that were not yet sold?

This is what I see in my Turbotax generated forms. My SVXY transactions for the year listed under short term gains on my Schedule D. Then there is also a form 6781 (contracts and straddles) which lists the amount in 11c as a "gain" with 40% being listed as short term and 60% as long term.

So my assumption is I am paying taxes both on my Schedule D gain (relatively small) and also on this much larger gain listed on form 6781.

After reading your original reply to me and some threads on the Turbotax forum, I still feel a bit stumped.

On the turbotax forum in a thread about UVXY, someone said you can arrive at the right amount by adding one additional "canceling transaction" for each transaction of the ETF on your schedule D, in which the dates are kept the same but the proceeds and purchase price are reversed.

That seems like a simple enough method. But is it correct? If I effectively "cancel out" my schedule D profits on SVXY, it looks like I will still be paying taxes on the 11c amount which is 360% greater than my year's profits on SVXY?

Your suggestion was to add the amount of 11c to my cost basis. I experimented with this to see what the result would be. I added up the total amount of dollars for my three SVXY purchases, and added to that the amount in 11c.

Doing this doubles my cost basis, so that I end up showing a large loss on SVXY on my schedule D rather than the small profit I made.

Does that sound right to you? And if so, how can I enter this on my form in such a way that the IRS will understand and accept it?

Thanks.

 

[sprstpd]

Just remember I'm not a tax expert, but the way I like to think about this is that in your case you are considered a partner in SVXY. And whatever actions the custodians of SVXY take have tax implications for you (i.e., what is on your K-1). In this case, the custodians traded futures on certain dates in order to manage SVXY, and what they did gets passed on to you (prorated) assuming that you held shares of SVXY on those dates.

However, the actions of the custodians does not really affect your total tax liability because any profit/loss you receive on your K-1 just affects your cost basis on your SVXY trades. So if you are showing a profit of $1,000 on box 11c of the K-1, you would report that in the appropriate place for Section 1256 contracts. However, you would increase the cost basis of your SVXY position by $1,000 (on the date when there is a "cumulative adjustment to tax basis") so when you sell it your profit would be $1,000 less on Schedule D (or Form 8949).

Again, I am not a professional tax expert, but as for how I would report it, I would report the trade that is reported to you by your brokerage. Then I would also a report a second trade that just shows the adjustment to the cost basis, so in the case above you would have a $1,000 basis and a sell for $0, resulting in a -$1,000 loss. I would annotate this transaction somehow as to its purpose. For example, you might say "See Statements" and then have a Statements section later on that explains this is a cost basis adjustment due to your K-1 box 11c. It is possible that your tax package might have a way of declaring this type of transaction within the software, but I doubt it. The key here is that you match the K-1 (you show the Section 1256 contract activity), you match your Form 8949 (you show the original SVXY transaction), and then you add a new transaction with an explanation.

And yes, it seems right that you show a cumulative loss on your Schedule D if you have a large gain in box 11c relative to your SVXY trading gains. The way to check if you are doing it right is to see if your total tax liability is correct - i.e., you should be paying for just your small SVXY gain after you combine your Section 1256 contract and your Schedule D totals.

And one more thing. It is possible you might not be able to manipulate your tax package so that you can clearly explain what you are doing to the IRS. I never e-file because of this. I send in paper returns with notes and explanations.

 

[fusiforme]

sprstpd,

Finally, I think I have understood how it all works! what was throwing me off was exactly what was going on with the math "behind the scenes" in turbotax and how all the numbers were joining together when I made the adjustments. But in addition to your latest reply, I also found a discussion between accountants on this very topic, which basically just explained in greater detail what you already told me. An accountant was trying to figure out how to do this for a client, and he had to do a lot of research before he understood. Then he did a run down of all the math, and explained exactly where the numbers were going and what the adjustments were doing.

So now I see how to verify the math and it is really a lot simpler than it seems. When I put the new number on my sched D against the number on my 1256 I end up with an amount almost exactly matching what my profit on the SVXY would have been had I simply made the trades and never filed a k-1 at all. I think the only reason it doesn't exactly match is because of small adjustments made from other sums inputted from the k-1.

I want to emphasize this for anyone coming to this thread in the future with a similar problem. After adding the 11c number to your cost basis, see what profit/loss figure you arrive at. And you can verify it is correct by putting that amount from your sched D against the sum listed on the 1256. You should end up with an amount close to your original profit/loss.

The process is so simple that I don't understand why ProShares doesn't simply issue a clear guide to this. As I think I mentioned in a previous post, when I talked to their investor help team last year, I was given totally false information. Likewise, if you try to search this topic on the web, you will end up in a very complicated labyrinth of unclear answers. You will get a migraine trying to make sense of it all.

Thanks again, sprstpd. Without you and your clear explanation of what to do, I am not sure I would have figured this out. Aside from the other recently discovered discussion between accountants, I have not found accurate information on this anywhere else I have turned. Also thanks for your suggestion of how to report it, because that is a great suggestion and what I plan to do.

On the positive side here, I am actually owed a large refund by the IRS. Now I just have to hope that they accept my amended return and do not deny the refund. From what I understand Turbotax does allow you to make a note to explain why you amended your return. So I think I will write something like : "adjusted cost basis of SVXY on sched d to reflect amount shown in 11c on shed k"

think that should be clear enough? should I also explain that the amount in 11c represents income I did not receive?

My one concern now is that whoever reviews the amended return may not understand the needlessly complex tax intricacies of this ETF.

 

[sprstpd]

So now I see how to verify the math and it is really a lot simpler than it seems. When I put the new number on my sched D against the number on my 1256 I end up with an amount almost exactly matching what my profit on the SVXY would have been had I simply made the trades and never filed a k-1 at all. I think the only reason it doesn't exactly match is because of small adjustments made from other sums inputted from the k-1.

Another reason the total tax liability might not exactly match is that the section 1256 contracts get 60/40% tax treatment, which you wouldn't get if you just reported your stock transactions as is.

The process is so simple that I don't understand why ProShares doesn't simply issue a clear guide to this. As I think I mentioned in a previous post, when I talked to their investor help team last year, I was given totally false information. Likewise, if you try to search this topic on the web, you will end up in a very complicated labyrinth of unclear answers. You will get a migraine trying to make sense of it all.

Honestly, I doubt that the "guide makers" at ProShares know enough to make a really clear guide. Plus, there are so many boxes on the K-1 with so many different ramifications, that a clear guide would probably be impossible. However, it would be nice of them to show a simple example that could be extrapolated to other situations.

This is not trivial stuff and I had no clue what was going on the first time I encountered a K-1 with non-zero numbers on it. I don't like not understanding something so I researched this issue until I felt comfortable with what was actually going on. And like you, I found very little information online with any true insight. With a few nuggets that I found online plus a lot of individual research and cross verification, I feel like I understand now.

Also thanks for your suggestion of how to report it, because that is a great suggestion and what I plan to do.

You are very welcome.

On the positive side here, I am actually owed a large refund by the IRS. Now I just have to hope that they accept my amended return and do not deny the refund. From what I understand Turbotax does allow you to make a note to explain why you amended your return. So I think I will write something like : "adjusted cost basis of SVXY on sched d to reflect amount shown in 11c on shed k"

think that should be clear enough? should I also explain that the amount in 11c represents income I did not receive?

My one concern now is that whoever reviews the amended return may not understand the needlessly complex tax intricacies of this ETF.

These are difficult questions. Is this for your 2013 or 2014 taxes? Just make sure that your adjusting the cost basis of the correct transactions in time (you should be able to match them up with the section of the K-1 where it lists your Units Disposed along with the Cumulative Adjustment to Tax Basis).

If it were me I would say something like "I received a K-1 from ProShares SVXY which showed a gain in box 11c due to Section 1256 contracts. By law, the cost basis of my SVXY position is increased the same amount as this gain. I made a mistake and did not increase my cost basis of my SVXY position and therefore was unduly taxed on this position."

Note that the above paragraph assumes that the only gain from the K-1 was in box 11c. If there are other boxes with numbers in it, you should include those in your cost basis adjustments too and in your argument to the IRS.

And there is always a risk that the IRS will not agree with you, but in that case you can point to the exact regulation that covers this (i.e., that gains/losses due to the partnership are reflected in your cost basis in disposed units). Hopefully it doesn't go that far.